Cooperatives and the Fair Trade Wine Paradox

My first taste of Fair Trade Wine was very satisfying, as I explained in this space a few weeks ago. The New Direction Malbec that Sam’s Club has been selling for about $10 makes a strong first impression (it was named the world’s best Fair Trade red wine in a British competition) and makes me optimistic about this class of “ethical consumption” goods.

[The image at right is the label of a Fair Trade sacramental wine from Chile that is marketed to Catholic churches for Communion use– can you get more “ethical consumption” than that? Nice idea — but 15% alcohol? Wow! Better keep an eye on those altar boys.]

Leigh Barrick, a student in the wine and society class I taught last semester, wrote a paper arguing that Fair Trade wine may be an especially good candidate for success because many wine consumers are actually interested in the details of production and not just the final product. If you don’t know or don’t care about who made what’s in your glass and how then ethical issues such as how much small growers are paid or how the environment is affected are difficult to motivate.

Wine is one of the few products we buy where we can frequently find the answers to who/what/when/where/how and why right on the label or on the promotional “shelf-talker.” Wine is good, I tell my friends, but wine and a story is much better and a Fair Trade or sustainability story makes the wine experience more satisfying for many people.

A Fly in the Ointment

But Fair Trade is not a panacea. Leigh argued, based upon her prior research into Fair Trade coffee programs, that there are many hurdles in the path of Fair Trade wine’s success. One issue that I have been thinking about recently is the role that grower cooperatives play in Fair Trade programs.

Cooperatives have a generally poor reputation in the wine industry. When I think of cooperatives the first thing that comes to my mind are those famously bad wines from poorly run cooperatives in the South of France. You know the ones I’m talking about, the cooperatives where growers are paid by the ton pretty much regardless of the quality of the grapes they bring in. The resulting wines are often thin, acid and tannic. These cooperatives are a classic example of the Prisoners’ Dilemma, where collective interest and individual interests are at cross purposes.

The collective interest of the cooperative members is of course to produce good quality wine at a competitive price so that their “brand” (which may be just the village or region AOC classification) has some value and they can earn a decent living. If the vineyards were owned and run by a single owner, with a specific interest in the brand, chances are that yields would be lower and quality would be the focus.

But, given that they are paid by the ton, each individual winegrower has a strong incentive to maximize yield. Quality generally suffers. Any individual grower who sacrificed quantity for quality would get lower income without significantly affecting the quality of the wine, since all the grapes dumped in the same press in a worse-case-scenario cooperative. As each grower responds logically to individual incentives, wine quality falls and the collective interest suffers. Europe’s lake of unsellable plonk is often blamed on the poor wines that this fouled-up incentive structure spews out.

Wait — It Get’s Worse

This image of wine cooperatives is enough to make you lose hope for Fair Trade wines, since they are typically made using arrangements centered on grower cooperatives (which act to distribute the higher payments and coordinate the communal investments that are the whole point of Fair Trade programs). If you need grower cooperatives to make Fair Trade wine work, and if cooperatives make lousy wine because of their incentive structures, then the future of Fair Trade wine looks pretty grim.

The story gets worse when you look at French wine history. French wine cooperatives were created to be Fair Trade organizations (although no one thought to call them that). As France industrialized and urbanized a hundred years ago, wine market power shifted from the growers, who owned the vineyards, to the distributors and negoçiants, who controlled access to the big markets.

Negoçiants had what economists call monopsony power. A monopolist is the only seller of a product and so can drive price up. A monopsonist is the only buyer and so can push price down. If the big negoçiant wouldn’t buy your just-picked grapes you were sunk, so growers were coerced (or felt coerced) into selling their grapes or wine for rock bottom prices. The negoçiants held the power because they could always buy grapes from your neighbor or the growers in the next village, but you had few options. Putting all your grapes back in the cart and shopping around for higher prices from another buyer in another town was not a very attractive alternative to taking whatever the negoçiant was willing to pay.

Will History Repeat?

Grower cooperatives were created to give growers protection from this cut-throat competition and to allow them to capture a larger share of the value of their production by banding together to negotiate a fairer collective price. This sounds a lot like the motivation behind today’s Fair Trade groups. And it worked, too, according to the evidence I’ve seen, at least for a while. But then the Prisoners’ Dilemma problem appeared and quality went down the drain. Or at least that’s how the story is usually told.

Will today’s Fair Trade cooperatives suffer the same fate as their antecedents in the South of France and elsewhere in Europe? Perhaps. But there is reason to think the Fair Trade wine story might have a happier ending. Watch for my next post on this topic.

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3 responses

I think the thing to remember is that in order for Fairtrade to be sustainable, Fairtrade products will eventually have to compete on quality. Since the introduction of Fairtrade products, we have seen a massive improvement in quality such that many Fairtrade goods have reached parity in terms of quality with non Fairtrade goods – this is especially true with coffee. I am hopeful that Fairtrade producers understand the need to compete on quality and that Fairtrade will continue to be a sustainable trading practise.

Is Fair Trade in the long-term interest of growers or workers? Commodity grapes are so easy to grow – you’ve written alot about wine lakes. When South American cooperatives can’t get the prices they want they can roll stones out in the streets and block traffic. But they won’t get french welfare state benefits so things won’t get any better for them. I think that things will get better as more people conclude that viticulture in SA is a good investment. As a marketing tool Fair Trade might help the SA wine industry. But I don’t see how Fair Trade organizations can drive quality because members will always have an incentive to cheat. The guys who actually make money growing grapes in France don’t do it with Fair Trade.

Can’t Fair Trade collectives be arranged to provide price per acre/ha of grapes harvested, rather than by the ton? Then grapegrowers would not get penalized for cropping at a level that would lead to higher quality wines. True, the collectives would make less wine, but it would be significantly better…

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What would you get if you crossed the Wine Spectator, America's best-selling wine magazine, with the Economist, the world's leading business weekly? The answer is this blog, The Wine Economist, which analyzes and interprets today's global wine markets. Staff: Mike Veseth (editor-in-chief) & Sue Veseth (contributing editor).